The Revenue Cycle: Sales and Cash Collections

Accounting Information Systems

CHAPTER 12

THE REVENUE CYCLE: SALES AND CASH COLLECTIONS

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

12.1Customer relationship management systems hold great promise, but their usefulness is determined by the amount of personal data customers are willing to divulge. To what extent do you think concerns about privacy-related issues affect the use of CRM systems?

The basic issue concerns the willingness of consumers to divulge the kind of information that would allow companies to personalize the sales interaction versus concerns that such information would be misused or sold to other parties. In addition, with the growing problem of identity theft, consumers are becoming increasingly concerned about the safety and security of their personal information. Companies that wish to collect this data will most likely have to demonstrate the need for this information to the consumer as well as the company’s ability to keep this information secure.

12.2Some products, like music and software, can be digitized. How does this affect each of the four main activities in the revenue cycle?

Digitized products do not change the four basic business activities of the revenue cycle. For all products, whether digitized or not, an order must be taken, the product shipped, the customer billed, and cash collected.

The only thing that digitized products change is inventory management as products do not need to be removed from a warehouse to be delivered. However, a copy of a product must be shipped (usually electronically, but in some cases it may need to be burned on a DVD and then shipped).

12.3Many companies use accounts receivable aging schedules to project future cash inflows and bad-debt expense. Review the information typically presented in such a report (see Figure 12-8). Which specific metrics can be calculated from those data that might be especially useful in providing early warning about looming cash flow or bad-debt problems?

The accounts receivable agingreport shows dollar amounts outstanding by number of days past due by customer and by invoice. The following metrics can provide useful early warnings about looming cash flow or bad-debt problems.

• The percentage of total accounts receivable categorized by days past due would alert management of categories that are increasing. This could also be reported by customer and by invoice. This way if a particular invoice was not being paid, the company could more quickly identify the invoice, contact the customer, and potentially resolve any problems or disputes about the particular invoice.
• Reporting by customer can help to identify chronic “slow paying” customers so that corrective action could be taken such as offering discounts for quick payment, changes in terms, and notifying the credit manager to restrict credit for this particular customer.
• The company may have a threshold for each category of past due accounts either in percentages or absolute dollars. A metric could be calculated and presented that highlights the categories exceeding that threshold.

12.4Table 12-1 suggests that restricting physical access to inventory is one way to reduce the threat of theft. How can information technology help accomplish that objective?

Possibilities include:

• Electronic locks on all entrances and exits to the inventory area.
• Smart card technology where employees must scan their ID card prior to entering/exiting the inventory area.
• Biometric access controls (fingerprint reader, face recognition software, etc.)
• Attach RFID tags to inventory items and install RFID tag scanners at each exit of the inventory area.
• Install and monitor surveillance cameras in the inventory area.

12.5Invoiceless pricing has been adopted by some large businesses for B2B transactions. What are the barriers, if any, to its use in B2C commerce?

Many companies are trying to incent their customers to sign up for automatic bill-pay. The primary barrier is consumer resistance to or fear of online bill payment in general. However, there are also problems on the seller side – particularly in regards to billing disputes. A related issue is the threat of asset misappropriation – how easily can the seller attempt to recover items sold to the consumer?

12.6The use of some form of electronic “cash” that would provide the same kind of anonymity for e-commerce that cash provides for traditional physical business transactions has been discussed for a long time. What are the advantages and disadvantages of electronic cash to customers? To businesses? What are some of the accounting implications of using electronic cash?

Any form of electronic or digital cash has the same audit risks as physical cash: susceptibility to theft and loss of an audit trail. In addition, digital “cash” also has risks associated with the durability of the store of value – to what extent can the cash be recovered if the storage media becomes defective?

Another issue concerns the potential loss of privacy, because the digital currency can be “marked” in a manner that enables tracing its path through the economy.

Finally, there is the question of how to provide and maintain an adequate audit trail to prevent unscrupulous businesses from “skimming” digital cash sales and thereby under-reporting sales for tax purposes.

SUGGESTED ANSWERS TO THE PROBLEMS

12.1Match the term in the left column with its definition in the right column.

1. __d__ CRM system / a. Document used to authorize reducing the balance in a customer account
2. __g_ Open-invoice method / b. Process of dividing customer account master file into subsets and preparing invoices for one subset at a time
3. __a__ Credit memo / c. System that integrates EFT and EDI information
4. __h__ Credit limit / d. System that contains customer-related data organized in a manner to facilitate customer service, sales, and retention
5. __b__ Cycle billing / e. Electronic transfer of funds
6. __c___ FEDI / f. Method of maintaining accounts receivable that generates one paymentsfor all sales made the previous month
7. _n__ Remittance advice / g. Method of maintaining customer accounts that generates payments for each individual sales transaction
8. _j__Lockbox / h. Maximum possible account balance for a customer
9. _k__ Back order / i. Electronic invoicing
10. _m__ Picking ticket / j. Post office box to which customers send payments
11. _l__ Bill of lading / k. Document used to indicate stock outs exist
l. Document used to establish responsibility for shipping goods via a third party
m. Document that authorizes removal of merchandise from inventory
n. Turnaround document returned by customers with payments

12.2What internal control procedure(s) would provide protection against the following threats?

1. Theft of goods by the shipping dock workers, who claim that the inventory shortages reflect errors in the inventory records.

Inventory clerks should count and document goods (on paper or by computer) as they leave inventory storage. Shipping personnel should be required to count and document receipt of goods from the finished goods storeroom to acknowledge responsibility for custody of the goods transferred.

Counting goods when they are received and when they are sent to inventory storage as well as when goods leave inventory storage and are sent to shipping helps maintain control over inventory. Reconciling the two sets of counts makes it more difficult for employees to steal inventory as it is received and shipped.

b.Posting the sales amount to the wrong customer account because a customer account number was incorrectly keyed into the system.

If the transactions are being entered online, closed loop verification could be used. The system could respond to the operator entering the account number by retrieving and displaying the customer's name for the operator to review.

If the transactions are being entered in batches, redundant data such as the first five characters of the customer's name could be included in each input record; after finding a match on customer account number, the system would also verify that the name characters match before posting the transaction.

Note that a validity check would only tell you if a valid customer number was entered, not if the correct valid customer number was entered. Likewise, check digit verification could tell you if the customer number existed, but not if it was the right customer number.

c.Making a credit sale to a customer who is already four months behind in making payments on his account.

Up-to-date credit records must be maintained to control this problem. During the credit approval process, the credit manager should review the accounts receivable aging schedule to identify customer’s with past-due balances to prevent additional sales to those customers. Alternatively, the computer system could be programmed to determine if the customer had any past due balances over a specified length of time (such as 60 days). If not, the sale would be approved. If they had a past-due balance, a notice could be sent to the credit manager who could review the sale and make a decision about extending additional credit.

A credit limit checkwould not be sufficient, because a customer could have a balance below the credit limit but be past due. A computer system could be programmed to check both credit limit and past due accounts and authorize sales. Sales not passing either the credit limit or the past due test would be sent to the credit manager for a decision.

d.Authorizing a credit memo for a sales return when the goods were never actually returned.

A receiving report should be required before a credit for sales returns is issued. The system should be configured to block issuance of credit memos without the required documentation that the goods have been returned.

e.Writing off a customer’s accounts receivable balance as uncollectible to conceal the theft of subsequent cash payments from that customer.

The problem usually occurs because the same individual writes off accounts and processes cash payments. Therefore, the best control procedure to prevent this problem is to separate the function of authorizing write-offs of uncollectible accounts from the function of handling collections on account.

f.Billing customers for the quantity ordered when the quantity shipped was actually less due to back ordering of some items.

Shipping personnel should be required to record the actual quantity shipped on the order document and/or enter the quantity shipped into the accounting system, in order that bills can be prepared based upon the quantity shipped rather than the quantity ordered. The system should be configured to generate invoices automatically based on the quantity shipped.

g.Theft of checks by the mailroom clerk, who then endorsed the checks for deposit into the clerk’s personal bank account.

In order to cover up this theft, the mailroom clerk has to be able to alter the accounts receivable records. Otherwise, a customer who is subsequently notified that they are past due will complain and provide proof that they sent in payment. Therefore, the critical control is to segregate duties so that whoever opens the mail does not have the ability to maintain customer accounts.

If accounts receivable updates the records based on a cash receipts pre-list instead of the actual checks, the mailroom clerk could conceivably lap payments. To prevent this, the cash receipts pre-list could be compared to the checks before the list is sent to accounts receivable. The checks should not be sent to accounts receivable as the accounts receivable clerk could perform the lapping.

Other deterrents used to deter theft of checks by the mailroom clerk include having two people open the mail, using video cameras to tape the check opening process, and utilizing a bank lockbox.

h.Theft of funds by the cashier, who cashed several checks from customers.

In order to cover up this theft, the cashier has to be able to alter the accounts receivable records. Otherwise, a customer who is subsequently notified that they are past due will complain and provide proof that they sent in payment. Therefore, the critical control is to segregate the duties of handling cash and making deposits from the maintenance of accounts receivable records.

One way to control cash receipts is shown below. The mailroom creates a cash prelist, sends a copy to a 3rd party, and sends the checks to the cashier. The cashier prepares duplicate deposit slips, sends the original to the bank with the checks, and sends a copy to the 3rd party. When the checks are deposited, the bank sends a copy of the validated deposit slip to the 3rd party, who compares all three documents to make sure all cash is deposited.

ChecksChecks and deposit

Mailroom CashierBank

Cash Prelist Deposit Validated Deposit

Slip Slip

3rd Party compares cash prelist, deposit slip

from cashier, and validated deposit slip from bank

1. Theft of cash by a waiter who destroyed the customer sales ticket for customers who paid cash.

In a manual system, all sales tickets should be prenumbered and accounted for so management can detect missing sales tickets.

In many restaurant systems, waiters cannot get food out of the kitchen without entering a customer order into the system. The system creates a prenumbered sales document that must be cleared by the waiter that day. This prevents the waiter from destroying sales tickets and giving people free food.

These systems also are capable of some reasonableness tests such as:

Beginning inventory of food

• Food used in the sales orders that day

=Ending inventory of food

The ending inventory of food is counted and compared to the projected ending inventory to determine if food items are missing. This check is most frequently used for expensive items of food like steak, shrimp, lobster, etc.

1. Shipping goods to a customer but then failing to bill that customer.

To prevent this from occurring deliberately, it is necessary to segregate the shipping and billing functions.

To prevent this from happening by accident, the system needs to automatically bill customers for shipments. The system should also be configured to periodically reconcile all shipments with a billing and generate reports of unbilled shipments for management review and corrective action.

1. Lost sales because of stockouts of several products for which the computer records indicated there was adequate quantity on hand.

Regular physical inventory counts need to be made, the results compared to recorded amounts on hand, and needed adjustments to inventory quantities made.

In this scenario, it is possible that the judgment as to what is “adequate quantity on hand” was inaccurate. This quantity can be improved using an accurate sales forecasting system and frequently reviewing and revising the forecasts as needed.

1. Unauthorized disclosure of buying habits of several well-known customers.

Access to customer information should be restricted using User IDs, passwords, and an access control matrix.

Employees given such access need to be trained to follow the organization’s privacy policies.

In addition, encryption of the data would prevent snooping by IT employees who do not have direct access to the application system. Otherwise, such employees may be able to use their access to the operating system to be able to view data.

1. Loss of all information about amounts owed by customers in New York City because the master database for that office was destroyed in a fire.

Data: Regular backups with copies being stored off-site.

Hardware and software: Hot or cold site arrangements for both

Recovery: Disaster recovery plan developed, tested, and in place

1. The company’s Web site was unavailable for seven hours because of a power outage.

A UPS can power a system for a time, but most are unlikely to be able to power a system for seven hours.

Two better options are

• Backup power generators capable of running the web site for seven hours
• Real-time mirroring, with the system switching over to the other site when the system went down.

1. Interception and theft of customers’ credit card numbers while being sent to the company’s Web site.

Encryption of credit card information prior to transmitting over the Internet. Typically this involves using SSL.

1. A sales clerk sold a $7,000 wide-screen TV to a friend and altered the price to $700.

All product prices and sales discounts maintained in the system

Use of barcodes and RFID tags to identify the product and sales price

A system configured to give sales clerks read-only access to pricing data to prevent them from changing the price.

Supervisor approvals for any needed changes or discounts to the listed price

A log of all system overrides and supervisor changes to prices

1. A shipping clerk who was quitting to start a competing business copied the names of the company’s 500 largest customers and offered them lower prices and better terms if they purchased the same product from the clerk’s new company.

Shipping clerks should not have access to customer account information.

Access (and attempted access) to customer records should be logged and reports reviewed to verify that only authorized employees see that information.

1. A fire in the office next door damaged the company’s servers and all optical and magnetic media in the server room. The company immediately implemented its disaster recovery procedures and shifted to a backup center several miles away. The company had made full daily backups of all files and stored a copy at the backup center. However, none of the backup copies were readable.

Periodically practicing and testing the backup and restoration process would verify its effectiveness.